Investors Have Taken Notice of This Net Lease REIT

chart01Although equity REITs did not fare so well in April, May seems to be a different story so far. Equity REITs managed a median return of 4.1 percent last week, with all sectors managing a positive return while 159 out of 170 REITs managed the same. Something that is particularly interesting because the performance of the S&P500 was flat across the same period of time.

As a result, it is no coincidence that more and more investors are taking note of equity REITs, with particular attention being focused on Agree Realty last week, which has made a comeback that delivered rich rewards for those that placed their trust in it. In short, Agree Realty is a net lease retail small cap alternative to ‘O’ and ‘NNN’, with a bad history associated with tenant concentration. Back when Borders declared bankruptcy in 2011, it harmed the REIT because Borders represented 20% of its annualized base rent. Since then, Agree Realty has worked on reducing its tenant concentration, though it is interesting to note that it has a pharmacy tenant concentration, as shown by the example of Walgreens, which still makes up 17 percent of its ABR.

Regardless, Agree Realty has managed to be one of the highest-performing net lease REITs with a 27 percent return in 2016, beaten out by Seritage Growth, which is a relatively new REIT that is still in its infancy. In general, net lease REITs have enjoyed impressive returns in spite of the fact that its sector experienced moderate growth, which was much more moderate than that of data centers, for example.

With that said, Agree Realty is not the only REIT of interest for curious investors. For example, Summit Hotel Properties managed a 11 percent increase in share price last week, partly because of its strong performance that was made public last week. The company reported a 13 percent increase in dividends and a 21 percent increase in AFFO per share in Q1. Similarly, Ashford Prime enjoyed a 9 percent increase in its share price last week. They reported a 46 percent increase in its AFFO per share in Q1 in spite of its ongoing struggle with one of its biggest shareholders over its future. In contrast, Winthrop Realty Trust lost 18 percent, which is no surprise since it is currently undergoing liquidation.

Source:Summit Hotel Properties, Inc.(NYSE:INN), Agree Realty Corp.(NYSE:ADC),Seritage Growth Properties(NYSE:SRG),Winthrop Realty Trust(NYSE:FUR)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on May 06, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of April 29, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Healthcare REITs Exposed to this Top Independent Living Tenant

chart01Last week, we showcased Genesis Healthcare, one of the largest providers of skilled nursing (SNF) in the United States. We discussed how a single operator could have a tremendous impact on multiple healthcare REITs. Genesis is such a sizeable tenant that they influence the bottom line of Omega Healthcare, LTC Properties, and Welltower. Today we will be featuring Holiday Retirement, another operator in the healthcare segment.

With over 300 senior living communities, Holiday Retirement is one of the largest providers of independent living in the U.S. Along with New Senior Investment Group, a healthcare REIT, Holiday is under the wing of Fortress Investment Group, LLC. Fortress is a global, publicly traded investment management firm with approximately $71 billion in AUM.

In addition to New Senior, Holiday has lease agreements with Ventas (NYSE:VTR), Sabra Health Care REIT (NasdaqGS:SBRA), and National Health Investors Inc.(NYSE:NHI).

Unlike Genesis Healthcare, Holiday is not publicly traded. Due to this fact we certainly cannot paint the entire picture. That being stated, we do know that Holiday’s founder sold the company to Fortress in 2007, and is set to mature as an investment in 2017. In addition, Fortress reduced the company’s assets by fifty-percent from 2013 to 2015. As you will notice the business sold many of their properties to REITs.

Is Independent Living Dependent On Medicare/Medicaid?

According to the above-mentioned REITs, we can infer that most independent living facilities do not have the high levels of exposure to both Medicare and Medicaid. These types of properties, different from SNFs, are subject to less government regulation due to the fact that they rely on private sources. On the other hand, when being compared to SNFs, independent living facilities share the exact same level of competitiveness resulting in the potential that their rent coverage may be thin.

What Is Their Exposure?

Holiday encompasses 76% of New Senior’s net operating income. Blue Harbor, a company that is also manages senior living properties and is a part of Fortress Group, covers an additional 12%. Together, these two companies consist of over 88% of New Senior’s net operating income. Based on that reason alone, any investment in New Senior is also highly concentrated in both Fortress and its funds.

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Holiday is a Ventas’ top tenant contributing 3% of net operating income. They certainly have been a contributing factor by increasing Ventas’s current footprint to 786 senior housing communities. In 2014 alone, Ventas acquired 29 senior housing communities in Canada from Holiday Retirement. This transaction is referred to as the Holiday Canada Acquisition.

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Holiday is Sabra Health Care’s second largest tenant. In fact, 17% of Sabra’s annualized revenues have been generated directly from a master lease with Holiday. In 2014, Sabra added 21 independent living facilities from Holiday. These properties are located in fifteen states, and have lease terms of 15 years.

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Holiday is a significant tenant for National Health Investors, encompassing 21% of their total rental income. In December 2013, National Health acquired 25 independent living facilities from an affiliate of Holiday. The company was able to ink a master lease term of 17 years.

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Source: New Senior Investment Group In(NYSE:SNR), Ventas (NYSE:VTR), Sabra Health Care REIT (NasdaqGS:SBRA), National Health Investors Inc.(NYSE:NHI).

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Massive cash-out reinforces good momentum of net lease retail REITs

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Oaktree Capital, a major shareholder of Store Capital Corporation (a net lease retail REIT), cashed out Store shares at their highest price since it became publicly traded in November 2014. Until recently, the shares had not suffered significant appreciation, but they are now about a third higher than their initial price.

Oaktree put up for sale more than 33 million shares, almost a quarter of Store’s outstanding shares. However, Store is not pocketing any of the proceeds–all are going to the selling shareholder Oaktree. One main concern was a significant drop in the share price, but it didn’t happen. Prices held up well, demonstrating that interest in this kind of REIT has attracted investors’ interest.

During a period of greater volatility in the first weeks of 2016, we observed that many investors flocked to net lease retail REITs. Companies such as Realty Income and National Retail Properties have appreciated by more than 15% this year, compressing yields to the lower four percent. Store, a net lease retail REIT, has accompanied that trend, as well.

Last December, Oaktree gave signs that Store could fly more freely when their ownership was below 50%. The company ceased to have “controlled status” and was obliged to comply with tighter requirements related to independent directors.

Oaktree is a global investment management firm, specializing in alternative investments with approximately $97 billion in assets under management as of December 31, 2015.

Seritage also benefits from the good momentum.

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Perhaps the good momentum of net lease retail has positively affected Seritage Growth Properties. The company, which is a spinoff of select stores of Sears Holdings, has caught investors’ attention for its shareholders. Many like the company because Warren Buffett and Bruce Berkowitz have invested in it; the rationale is that they must have access to information other people don’t so it’s a good buy, even though the company is concentrated on a failing tenant and its yield is a meager 2.0%.

Despite finding it a risky strategy, I’ve read a lot of theories why one should invest in Seritage. The most common idea is that there should be upside once the properties are leased to other tenants. Some investors have indicated that by looking at the property level the company is undervalued. The conversion to other tenants should take time and capital so I’d only invest if I knew the company was deeply discounted. Also, there’s a cap of 50% conversion of the properties, so Sears’ concentration should continue in the long haul.

Source: Seritage Growth Properties(NYSE:SRG), STORE Capital Corporation(NYSE:STOR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Amerco Shareholders, Will You Change Your Mind?

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Companies that have considered a REIT spinoff, but not acted on these considerations yet may be forced into making a decision sooner rather than later, as there is the possibility that Congress may ban these for tax reasons. A number of established companies have already created these spinoffs, while others have decided against them.

Sears Holdings Corp. has arguably had some success with REIT spinoffs. They have created a separate company, Seritage Growth Properties, as a response to the pressure that was building due to poor sales. This new stock has performed relatively well, with its share price increasing by 10% since the company went public in July.

chart03A company that expects to have a greater degree of success is MGM Resorts International. The activist group Land and Buildings had some influence over this decision, and while it has not completed the spinoff yet, the group estimates a 50% upside from current levels.

chart04McDonald’s Corporation has decided against creating a REIT, and this was announced at an investor meeting held in November. The company felt that the risks, especially financial and operational, were greater the gains.

chart02Amerco had a similar decision to make late August by their shareholders. The board recommended a vote against putting the real estate that the company owns into a REIT, and the shareholders upheld this decision at their annual meeting. However, there are a number of reasons why they might now change their minds.

Amerco, which is the parent company of U-Haul International, has an advantage over the rest of these companies because it operates in the self storage sector. This means Amerco has the opportunity to unlock asset value in a sector where REITs have enjoyed AFFO multiples close to 30x, one of the highest in the industry.

The valuation metrics of the self storage REITs suggest that Amerco would gain from creating a REIT. For instance, the average price/revenues for a self storage REIT is approximately 14x. In the case of Amerco, the self storage segment would have a market capitalization of $3.3 billion, which is about 45% of the company’s total market capitalization. This is impressive when you consider that Amerco’s self storage segment only generates 6% of total revenues.

Source: Sears Holdings Corporation (NASDAQ:SHLD), Seritage Growth Properties (NYSE:SRG), MGM Resorts International (NYSE:MGM), McDonald’s Corporation (NYSE:MCD), Amerco (NASDAQ:UHAL), Yahoo! Finance, Fast Graphs.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.